argusmedia.com Biomass leaders’ predictions for the industry · Johan Mertens (GDF Suez), Arnold Dale (Ekman and Co.) and Brodie Govan (PVM). Argus Media is a leading provider of

Bioenergyilluminating the markets

Biomass leaders’ predictions for the industry

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IntroductionArgus has gathered together the views and opin-ions of over 120 biomass industry professionals through a survey and direct interviews with the leading organisations driving the industry for-ward and are pleased to share the trends and outcomes with you.

In this paper you can hear the specific views and predictions from: Christian Rakos (European Pellet Council), Gordon Murray (WPAC), Michele Rebiere (Viridis Energy), Annalisa Paniz (AIEL), Doug Smith (Cellmark), Peter Thomsen (Dong Energy), Raul Kirjanen(Graanul Invest), Vaughan Bassett (Pinnacle), Tiago Andrade (Wood Pellet Services), Johan Mertens (GDF Suez), Arnold Dale (Ekman and Co.) and Brodie Govan (PVM).

Argus Media is a leading provider of data on prices and fundamentals, news, analysis, consultancy services and conferences for the global crude, oil products, LPG, natural gas, electricity, coal, emissions, bioenergy, fertilizer, petrochemical, metals and transportation industries. The next Argus Biomass conference will be held in London, 5-7 April 2016. Visit www.argusmedia.com/euro-biomass.

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Contents04 The biomass market continues to evolve

08 The biomass industry in numbers

08 The top 5 predictions for the biomass industry between 2016 and 2020

10 The most significant challenges in the biomass supply chain

11 Biomass buzzword for 2015

12 Which European country has the highest growth potential?

13 Outlook on the premium pellet market in Europe

17 Outlook on the Asian markets

21 Wood pellet producers eye US potential

23 Q&A with Renewable Energy Association

27 Q&A with DONG Energy

31 Q&A with Graanul Invest

36 Q&A with Pinnacle Renewable Energy

40 Q&A with Wood Pellet Services

The biomass market continues to evolveBy Jessica Dell, Editor, Argus Biomass Markets

The biomass market has seen significant shifts over the last year — most notably a growing convergence of the industrial and residential markets, and an increased interest in trade outside of the traditional transatlantic routes. Market participants that had traditionally focused attention on the ARA hub began to look further afield to burgeoning demand in Asia-Pacific, while those in the home heating markets were made to sell their supply into the industrial market, owing to mild weather and consequently weak demand.

Argus Media has been assessing industrial wood pellet prices in the US and northwest Europe since 2009, noting

fundamental shifts in supply and demand and tracking shortterm movements and longer term developments in the spot markets. The Argus cif ARA spot index brings greater transparency to an often opaque market, helping companies to manage their exposure as well as driving liquidity.

The Argus spot cif ARA price has eased over the last year, but this move has been relatively modest both in a historical context and relative to other parts of the energy complex. The fluctuations we have seen have been the result of events relating to particular power plants going on or off line. Because the existing pool of converted units is so small, every time there is an outage at a sizeable plant — such as at the UK’s Ironbridge plant last February, and the Dutch Amer plant — or a plant loses a subsidy and is forced to come off line — as Belgium’s Rodenhuize plant did from April to August 2014— this can have a material impact on the spot price. This is likely to be the case going forward until there is a wider pool of players – something that everyone from the supply and demand side has been calling for. The price falls

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The biomass market continues to evolve

that we have seen are in part a consequence of continued euro weakness. There was still certainly spot trade that we saw from the southeast US to ARA, but there was much more of a focus on euro-denominated cargoes because of currency pressures as the dollar neared parity with the euro.

With European demand relatively weak this year, other markets – in particular, South Korea, — became increasingly important. In February, South Korean generator Kosep issued sizeable tenders. With buying interest in the European market pretty scant at that time, all eyes were on the South Korean market, with potential for locational swaps trade if the generator had taken North American volumes. There was certainly an expectation in the market that Canadian volumes, with sustainability criteria in place, could supply a decent share of the tender. But the tender, like subsequent ones — was awarded to Vietnamese supply at lower prices than last year— thwarting swaps trade. Although the South Korean tender did not end up being a source of support to cif ARA prices, European participants are still keeping a keen eye on growth in the Japanese and South Korean markets

Meanwhile, the importance of subsidies in this market has never been as salient as in the last year. At this time last year we were looking at the Eggborough and Lynemouth plants and three additional units at the Drax plant for coal-to-biomass conversions in the UK. One year on, unit 1 is still planned at Drax, and the aim is to have enhanced co-firing in the third quarter, while unit 3 converted

in October 2014. But the conversion of unit 4 is now less likely. Eggborough has been bought by EPH, and the company has been fairly silent on whether or not it could convert to biomass. While EPH has not ruled the conversion out, it seems unlikely that three units would convert to biomass. And although RWE’s Lynemouth conversion is still planned, the project has hit delays because of an EU investigation into the amount of state aid that the project was awarded.

The bottom line is that there is just not enough money in the pot for biomass — and this has frustrated everyone from developers to suppliers. The UK’s levy control framework is the total budget for renewables up until 2021, and the UK has for now split off coal-to-biomass conversions in a separate pot and did not allocate any funds for conversions under the contract for difference (CFD) scheme for this year. At the same time, UK energy ministry DECC has proposed scaling back subsidy support for grandfathering under the renewable obligation certificate scheme. So coal-fired plants looking to convert to biomass that have not already secured funding under the early CFD scheme, are not left with a great many options at this stage. Drax recently said that unless funds become available for conversions under future CFD allocation rounds, it is unlikely to go ahead with the conversion of its fourth unit.

Although there have been delays to UK conversion projects, and uncertainty about just how many more plants can come on line, the demand picture is not bleak if you

Because the existing pool of converted units is so small, every time there is an outage at a sizeable plant or a plant

loses a subsidy and is forced to come off line, this can have a material impact on the spot price.

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are a supplier. We will still see increased consumption in the UK, as well as demand ramping up in the Netherlands, Belgium and Denmark. The Dutch market in particular is another clear example of where subsidies completely control biomass burn. In order for biomass subsidies to be awarded under the Dutch government’s new SDE+ scheme, energy companies and non-governmental organisations had to reach an agreement on the sustainability of biomass supplies. The

two sides finally came to an agreement in March, ending months of impasse. The cap on consumption is 3.5mn t/yr, with Engie — formerly GDF Suez — RWE, Eon and Vattenfall the most likely contenders for co-firing. But that 3.5mn t cap will not be reached this year, and is unlikely to be reached next year. Some companies have already voiced concerns about the business case being under pressure given current subsidy levels and with continued dollar strength. But most market participants anticipate that we will see much more significant levels of biomass burn in the Netherlands by 2017 and 2018.

The flip side to that potential for a tighter market is of course the amount of supply coming on stream, and the market is keenly focused on how quickly several planned production units in Canada and the US can come on line. Production delays are not an anomaly. We have already heard cases where sustained dollar strength has posed a problem to new projects, and the exchange rate factor could weigh on producers that have not yet sold most of their planned output under long-term agreements. With a significant level of new capacity planned for this year, cif ARA prices will very much be a reflection of that supply timetable coupled with how quickly demand can ramp up in the UK, the Netherlands and Denmark.

Meanwhile, in the residential market, the big theme of last year is that consumption did not meet expectations. The market continued to grow year on year, but did not meet some of the more inflated growth forecasts that were touted last year. Unlike the industrial market, the residential market is not reliant on government subsidies, so growth will be more organic in nature. But the European market was hit by another mild winter, and depressed oil prices, which narrowed the cost advantage that pellets have over heating oil. Nevertheless, the residential market, and particularly the EN Plus market, is still poised to maintain growth, as consumers look to less costly and more renewable options for home heating, but with biomass burn levels highly dependent on what weather this winter brings.

The residential market, and particularly the EN

Plus market, is still poised to maintain growth, as

consumers look to less costly and more renewable options for home heating, but with biomass burn levels highly dependent on what weather

this winter brings.

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The biomass market continues to evolve

As always in the biomass market, there are several interesting developments on the horizon. The implementation of the Sustainable Biomass Partnership framework could increase liquidity, and market participants are expected to profit from the greater ease of trading that its uniform criteria will bring. We are likely to see a continued convergence of the residential and industrial markets within Europe. There used to be a much greater premium for residential pellets, but over the last year, we have seen EN Plus pellets move into the industrial market time and time again, as residential demand has weakened. And finally, Drax is moving

towards vertical integration with the addition of its pellet plants in the US, while other pellet producers have shown an interest in power plants, in order to avoid the problem of matching up supply and demand in the right timeframes. We could see further moves toward vertical integration as well as consolidation on the supply side in this market.

With various shifts in consumption and production patterns in the international wood pellet market, there is one constant — this market will continue to mature and adapt, as it has since its inception.

Argus Biomass Markets is the leading publication for the international wood pellet and wood chip sector.

In addition to publishing the spot cif ARA index, Argus also assesses spot fob Baltic, fob Portugal and fob US prices, and assessments of forward prices for delivery for these markets. Argus has also launched a spot fob Vietnam price.

News coverage includes shifts in supply and demand in the industrial market with a particular focus on changes to subsidies, the burgeoning residential sector, sustainability issues and market growth in Asia, particularly South Korea and Japan.

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The biomass industryResponses from over 100 biomass industry professionals surveyed in 2015.

in numbers

The top 5 predictions for the biomass industry 2015 – 2020

The biomass market should expect increased sustainability requirements on both premium and industrial pellets

This could be the year that torrefied and steam-exploded pellets move more into the mainstream, with many citing lower operational costs

ADDiTionAl viEws froM Top lEADErs

I would like to see increased standardisation on trade terms, sustainability and quality. Perhaps we will see a simultaneous development of niche markets in black pellets and low-quality pellets. And there will be an increased convergence between the industrial market and residential market — it is to the benefit of both markets that pellets can be traded across. The upcoming focus of the effort to commoditise the wood pellet market should emphasise our continued commitment to SBP, develop a more effective standard master agreement, review and harmonise the standard quality specifications, organise a laboratory ring test and promote spot trade.

peter Thomsen Dong Energy

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The biomass industry in numbers

Following the Enviva-Green Circle takeover, several respondents expect increased consolidation on both the supply and demand side

Increased demand will come from emerging markets in South Korea and Japan, but some expressed caution that policy uncertainty could stymie growth

Overall, many participants cite further growth for the biomass market – both from UK coal-to-biomass conversions and increased home heating demand – as well as further maturation of the market as a whole

I hope that European governments that are well behind their EU 2020 targets will see that converting existing coal-fired plants is a reasonable and long-term solution to generating reliable renewable energy. The 2020 deadline is very close and I think anything that is planned for 2018 we would already know about, so the time is short to make decisions if governments want to be ready by 2020. I expect growth in all sectors, but which will grow the fastest is in the hands of politicians. I hope that governments will also recognise the huge potential and benefits of industrial heat and steam — the high efficiency of those installations, the local jobs they will support and the speed at which they can be developed.

raul Kirjanen Graanul Invest

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59


The most significant challenges in the biomass supply chain

Recurring themes in the ‘Other’ category included logistics, sustainability, and raw material supply.

36%Costs

26%other

standardisation23%

Quality14%

ADDiTionAl viEws froM Top lEADErs

“My view is that by 2025, China will have come into the picture as a significant consumer of wood pellets. So it will be an interesting time for everyone. South Korean generators are likely to be in competition with China for nearby produced southeast Asian wood pellets. South Korean independent power producers will have partly contracted their fuel by then but might still be short on their uncontracted quantity. Japanese projects that have contracted with reputable fuel suppliers will be virtually unaffected.vaughan Bassett

Pinnacle Renewable Energy

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Biomass buzzword for 2015

6%Fines

US and European wood pellet buyers, all things being equal, would probably compete quite strongly for North American supply. But I sense that the Europeans are already thinking about this issue and are trying to position themselves with even longer-term offtake agreements. This could work to shut out some American buyer competition, but the weakness in the execution is that European governments are being increasingly coy about future subsidy programmes. So in the end, it might be this very reluctance by European governments to enable their utilities to contract fuel longer term that inadvertently makes the American biomass buyer a more attractive prospect for North American biomass.

Sustainability63%

16%

15%Torrefaction

Premium

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which European country has the highest growth potential?

56%20%

13%

11%

Germany

france

italy

United Kingdom

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Outlook on the premium pellet market in Europe

QHow do you see the heat market evolving in Europe?

Michele rebiere

“Having helped establish the distribution channels and business

model in the US, we are fascinated to see the European heat market start to ready itself for change. It is most evident in Italy, where channel conflict has started to occur and small players wrestle with tier 1 distributors for retail dominance. The European heat market is primed for a well thought-out distribution program.”

Doug smith

“We feel strongly that the heat market will continue to grow

steadily, despite the current issues such as depressed oil pricing, weather-related seasonality and currency pressures. Biomass heating continues to provide a reliable, economical and scalable solution for homeowners, small businesses and commercial institutions. This will inevitably require an increased reliance on imported pellets into the European market. We believe that the heat market will see consolidation among distributors and customers, as well as the emergence of more sophisticated buying mechanisms and contracts.”

As the premium and industrial pellet markets continue to converge and businesses look at the potential growth in both sectors we gathered opinions from market participants on developments from the supply and demand side.

“What a great idea to add the premium pellet focus day. I found it very valuable. Makes the trip overseas very worthwhile.” Scott Bax, Senior VP, Operations, Pinnacle Renewable Energy

feedack from last year’s premium pellet Day at the Argus Biomass conference

“It was very informative and interesting from a premium market perspective.” Annalisa Paniz, Manager AIEL

The next Premium Pellet Focus Day will take place on 5 April in London at Argus Biomass 2016

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QWhat are your expectations for growth in the premium market?

Christian rakos

“Sales reached 11mn t in 2013 but declined to 10mn t in the following

year, mainly because of an unusually mild winter. The 2014-15 winter has so far been unusually mild, which has been particularly upsetting in Italy, where virtually no demand was seen in November and December. Lower demand because of warmer temperatures was partly compensated by the sales of new equipment, but these declined in 2014 compared with 2013. Boiler sales decreased by 30pc in Germany and 40pc in Austria — again a consequence of the mild weather dampening interest. Stove sales saw less significant declines in the key markets of Italy and France. The falling oil price is also moving incentive away from pellets and having an effect on equipment sales. The oil price will not stop consumers who already have the equipment from using pellets but it will affect the growth of the market.”

QWhat European countries are poised for greater consumption growth?

“There is likely to be growth in France, Italy and the UK. The residential market

in the UK is looking strong. There are good incentives in place — such as the government’s Renewable Heat Incentive subsidy scheme — and the market is gaining further momentum. Spain will also start to become a significant market. It is interesting that the residential pellet market is growing even in suffering economies. People are becoming more money savvy as economies struggle.”

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QThe Italian government increased the value-added tax (VAT) on wood pellets to 22pc from 10pc the beginning of this year, a move that could significantly increase retail prices. Coupled with the mild winter and depressed oil prices, what is the current outlook for the Italian market?

Annalisa paniz

“As it was a relatively mild winter there are a lot of pellets in the

market and the delivered price is lower compared with the same period last year. People installed pellet stoves to reduce their heating costs, so the VAT increase will lead to a reduction in the number of installations of pellet stoves. Market players may prefer to keep the price of pellets lower in order to avoid a price increase for the end-user. There is a huge amount of pellets in the market and retailers will want to avoid losing the trust of end-users.”

Christian rakos

“The VAT increase in Italy will have an impact on prices — it is

the wrong move at the wrong time. Over time it will decrease the growth of the premium pellet market in the country.”

QWill Canadian producers become more involved in the residential pellet market?

Gordon Murray

“We are getting more involved in the European residential market —

volumes to Italy are up. Other countries are more or less self-sufficient, such as Germany, Austria and Sweden, so the impact we can make is limited.

The US has tenfold the population of Canada so we can take advantage of demand there, particularly in the northeast. Smaller suppliers and producers can truck in shipments, rather than using rail and ship.”

QWhat prompted Viridis’ decision to diversify production?

Michele rebiere

“The decision to diversify was 50pc vision and 50pc necessity. Chief

executive Christopher Robertson has always taken a contrarian view to new markets and this was no exception. At the time Viridis began diversification in 2010, Christopher opted not to follow the pack and focus on long-term industrial contracts in Europe. Viridis had established success in the home heating market in Canada and the US so it was really a question of expanding that with a strong brand — and then looking at how to mitigate risk as we brought more volume on stream. We now have an excellent balance between Europe, North America and southeast Asia, a balance between premium and industrial pellets, and between bulk and bagged product.”

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QWhat challenges do you consider to be unique to the production and logistics of premium pellets?

“Quality monitoring is the nature of production of any type of pellet

but is underscored in the production of premium pellets. We are fortunate as an industry to have prescriptive standards to adhere to, so it takes the subjectivity out of the quality process. But there is more complexity to co-ordinating finished goods of premium pellets. In any given facility, we may have 15 to 20 stock keeping units (SKU) that require scheduling and co-ordination of order backlog, supplies of bags, pallets and other materials. In addition we must consider loading and outbound operations which may include trucks, intermodal vans and containers. There is a great deal more manpower involved in this type of production than a straight bulk shop.

Michele rebiere Doug smith

“The residential pellet market is different from the industrial market

in many ways. The quality thresholds in the premium market are more stringent than in the industrial market. These include the well-known ash and fines parameters but can also include intangible items like colour and length. The bagged market is very much brand driven and the end-user has strong loyalties to individual brands and producers.

Logistics are also very different given that shipment and delivery quantities are significantly smaller requiring unique logistic solutions. For imported pellets, these smaller shipment quantities require a multitude of shipment options including part cargoes, containers and multiple port calls.

Christian rakos

“No, not for the time being. I believe consumers believe and see pellets

as the most sustainable option for heating. This is the advantage of a small-scale energy system.

Doug smith

“Forest products and biomass will always be under a unique form

of scrutiny which even fossil fuels are not. As the premium market continues to grow it will inevitably attract more questions. Thankfully, the industry has a strong, compelling response to all these issues and is operating responsibly and professionally. Our customers are already ensuring that they are sourcing in a responsible manner from their suppliers.

QSustainability of biomass supplies has been a big issue in the industrial market. Do you think it will become more of an issue in the premium market?

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Outlook on the Asian MarketsSouth Korea has posted strong year-on-year growth in its wood pellet imports in 2014, despite proposed regulatory changes that threatened to cap consumption rates , but which never came into effect. The country’s wood pellet imports totalled 1.84mn t last year, according to customs data, a year-on-year increase of 235pc.

The market remains poised for continuing growth, backed by the country’s renewable portfolio standard, which incentivises power generators (gencos) to co-fire wood pellets. But whether the key supply routes, with Vietnam maintaining its position as the top exporter, will remain the same is yet to be determined. This largely depends upon whether gencos implement proposed sustainability requirements and have more stringent quality control — moves that could potentially support increased imports from North America despite their higher cost.

Similarly, any move to increase co-firing rates would be advantageous to those suppliers offering higher quality pellets, while a move to longer term contracts would be welcomed by larger North American producers. Focus on the South Korean market has certainly increased lately, evidenced by a record number of bidders participating in tenders, and this trend is likely to continue.


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QDo you think that we will see more gencos in South Korea moving to long-term contracts over the next couple of years, or will it largely remain a short-term tendering system?

Johan Mertens

“The trigger for a move towards long-term contracts is likely to be

the increasingly demanding requirements that can no longer be met by existing pellet factories. New investment in pellet plants will require long-term commitments. At the moment in Asia, many pelletizers are also being used for pelletizing agri-products, such as animal feed pellets.

Arnold Dale

“I always think that you should buy locally if you can and that is what

is happening. South Korea is getting a lot of material from Vietnam and Malaysia and they will start to produce more and more – but there are quality issues with these cargoes. I look back at the pellet market as it was 10-12 years ago – there were no long-term contracts, everyone managed on the short term. It only started when the US and Canada started to build bigger pellet plants. They required long-term contracts so that they could go to the bank and borrow money, which had not been the case in Europe. The Europeans did not need long-term bankable contracts to build the factories, because most would use their own residues to make pellets, and this made a good business case. But then the North Americans entered the market on a different scale. I think South Korea will follow the European trajectory, taking volumes from lots of little manufacturers, and once they reach that point where there are insufficient offers, they could look at something longer term with the Canadians and Americans.

Brodie Govan

“We have seen Kowepo make the first move by announcing it will sign a

1-3 year contract for 10,000-30,000t but it is a long way from supplying the sort of offtake required to build a new pellet production plant. I think the only way we will move away from a spot tendering system is if South Korea decides all volume must be certified and chain of custody provided. If that happens they will not be able to rely on southeast Asia and China and will then have to follow the current Japanese position of signing long-term deals with certified suppliers in places such as Canada.

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Outlook on the Asian Markets

QDo you think that sustainability of biomass will be a more salient issue in the South Korean market this year?

“I believe it definitely will. South Korean gencos are currently

tightening quality and sustainability controls, following some quality issues with Asian sourced pellets last year. Gencos are now tendering for “certified” pellets. However, it is not completely clear at this stage what is included under the term “certified”. For the time being it is understood that schemes such as FSC, GGL etc. would also qualify.

Johan Mertens Brodie Govan

“The Korean government has decided that FSC or PEFC

certification doesn’t work for them. There has been reports some Vietnamese producers were sharing certificates and supplying pellets made from old furniture which was clearly not sustainable and clean product. So Korea has decided to implement their own standards that requires producers to send samples and proof from the Vietnamese government about the origins of the material. Hopefully this improves the Korean system in the year ahead but it’s a pity they don’t just sign up to SBP instead and remove the uncertainty.

QWhat is your general outlook for the South Korean market? Will we see a shift in trading routes to South Korea over the next year, or do you think Vietnam and Canada will remain the largest exporters?

“I believe pellets will continue to come from the Pacific basin, mainly

Vietnam and Canada, with smaller volumes potentially coming from Indonesia and Thailand. Australia is a potential challenger capable of meeting west Canadian type shipment sizes and quality. I believe for 2015 volumes will probably still be modest. The cost burden from the US southeast to South Korea is high.

“I am positive about wood pellet growth in South Korea for this year

at least. Looking ahead I am hopeful that wood will remain as the primary biomass fuel but it seems that we will see strong exports from southeast Asia of BioSrf, EFB and PKS pellets. The focus today is still very much on wood, but there are signs that other feedstocks will play a big role. Vietnam will remain the largest importer, but it will be China that follows in second unless we see stringent sustainability policy become binding.

Johan Mertens Brodie Govan

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QWhat is your growth outlook for Asia-Pacific exports in 2015?

Gordon Murray

“Exports to Asia-Pacific [from Canada] are up substantially.

South Korean exports reached about 350,000t last year, and are likely to be similar in 2015. But that is not a fun market as it is hard to predict because of the tendering system. Western producers seem much more interested in Japan because the customers are more reasonable to deal with. Japan’s feed-in tariff system is supporting the industry and there are a number of new plants under development and under construction.

woochun Choi

“We are focused on the South Korean market and the demand for biomass,

especially wood pellets, is sharply increasing. My role in the US operations is to source North American wood pellets and export to South Korea. The UK is the centre of commodity trading and we deal with a lot of traders in London. Last year was my first visit to an Argus conference and I had a lot of useful meetings there.

QHow did you find the last Argus biomass conference?

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Outlook on the Asian Markets

Wood pellet producers eye US potential

The UK is the world’s biggest biomass market but the recently elected government is rapidly dismantling support for the fuel, putting plans for new US wood pellet plants in jeopardy. Yet the arrival of President Barack Obama’s Clean Power Plan could bring fresh hope to the industry.

First, UK energy ministry Decc ring-fenced support for coal-to-biomass conversions in a separate pot under its contract for difference scheme — but did not allocate it any funds this year. Then, finance minister George Osborne scrapped the climate change levy exemption for renewable power, cutting into the profitability of biomass burn. And, while the industry was still reeling from this, Decc announced that it would slash subsidies under the renewables obligation scheme for future biomass conversions and co-firing plants.

The combination of tax rises and lower subsidies is undermining the business case for biomass in the UK, to the extent that some industry participants are prepared to walk away. Developers of UK biomass projects are ready and willing to find new markets, and many see potentially lucrative opportunities elsewhere in Europe and within the US. Europe’s largest biomass buyer Drax says its fourth unit is less likely to convert from coal

to biomass because of this lack of subsidy support.

The UK market will still remain the largest industrial market in the world for the foreseeable future, owing largely to Drax’s existing three biomass units, RWE’s planned Lynemouth conversion and MGT Power’s planned combined heat and power plant. But it is time for the biomass market to look elsewhere for new growth, and it need look no further than the US — a country that has been principally involved as the source, not the consumer of industrial pellets.

Under Obama’s Clean Power Plan outlined at the end of July, US states may use so-called ‘qualified biomass’ — biomass feedstock that is demonstrated as a method to control CO2 levels — as a component of their plans. The Environmental Protection Agency (EPA) will determine what constitutes qualified biomass feedstock in its review of state plans, expected by 2017.

Coal producers’ market share in the US is declining amid plentiful and cheap natural gas. Coal-fired plants could embrace co-firing as part of their compliance strategy, and would not have to look far to find wood pellet fibre baskets. This would also help assuage

Jessica Dell

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a chief concern of NGOs, which lament the environmental impact of shipping wood pellets across the Atlantic Ocean.

A domestic industrial wood pellet market, pending a favourable outcome from the EPA, would help soak up the significant amount of new production capacity planned in the US in

the coming years. Of course, it is not without political risk, as many politicians are already working to dismantle Obama’s plan. But those industry participants that have been frustrated by the UK hindering support for biomass can take solace in the fact that the US is paving the way for more biomass burn.

US industrial demand would help support the wood pellet market up until and beyond the 2027 “cliff edge” in the UK. It could also appeal to coal producers. Business as usual for coal producers is not good for them — their market share is declining by 10pc/yr because of cheap natural gas. A co-firing strategy would provide a reason to preserve those coal plants instead of shutting them down.

States that should be targeted for pellet co-firing are those that have pulverised coal plants and strong logistics for getting wood pellets from the fibre baskets to those power plants. Western Pennsylvania, eastern Texas, West Virginia, and Tennessee are examples of states that have “all the right stuff” for a co-firing strategy under the Clean Power Plan regulations.

Bill strauss, president of biomass consultancy group FutureMetrics

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Wood pellet producers eye US potential

with Renewable Energy Association

Q&AArgus interviewed Frank Aaskov, policy analyst at RenewableEnergy Association (REA), about the biomass industry in theUK and its future

QWhat has helped drive the success of the smaller boiler non-domestic category? How can the other categories be encouraged?

“The small biomass market [less than 200kW] has proven to be very successful in delivering growth. In the first year and a half of the non-domestic RHI,

deployment was very low, and the RHI was underperforming. But the market started to grow as companies learnt how to sell biomass boilers, found the right business models and consumers’ awareness increased. One of the barriers for other technologies to grow is tariff uncertainty. The government’s degression mechanism automatically degresses tariffs if there is too much growth in a market compared to RHI models and budgets. The uncertainty in tariff levels will limit projects with a long lead time — such as biomass combined heat and power [CHP], geothermal and large biomass [above 1MW] — as their tariff could be degressed multiple times before project commissioning. A tariff guarantee could give the certainty the industry needs.

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QHow can the RHI be improved to support biomass and other renewables? Does the current banding system work efficiently?

“The small and medium biomass bands definitely need to be combined to the same tier 1 tariff and tier 2 tariff at the medium biomass rate, and the tier 2

tariff should not be degressed below that for large biomass. This will give confidence on meeting on-going running costs and will tend to converge all support levels over time. It is also worth including heat delivered by direct air from solid biomass or biogas, which can be delivered at a very cost-effective subsidy. There is a need to improve certainty for projects with longer lead times through RHI rate guarantees at financial close, and “un-degress” the biomass tariff domestic RHI.

QThe REA has, in the past, urged for more support through the contracts for difference (CFD) scheme for dedicated and co-firing biomass by providing “sufficient CFD budget to allow sustainable biomass to play its full role in cost-effectively meeting our 2020 target”. How much more budget is needed and how can the CFD scheme be improved to support dedicated and co-firing biomass?

“At present there is no tariff for dedicated biomass in the CFD mechanism at all — clearly dedicated biomass should be supported in the CFD mechanism

as it provides cost-effective, stable base-load power generation and can be delivered relatively quickly. It is not so much putting a particular amount of extra budget in, but allowing the technology to apply in the first place.

QWill the RHI domestic category’s second 20pc degression in six months impact the growth of the market?

“It most likely will. We are already hearing from our members of a slowdown in the market. We are being told that it is increasingly difficult to sell biomass

boilers and that many companies are reconsidering their place in the domestic biomass market. The biomass tariff in the domestic RHI has been degressed once too many, as we are not seeing the cost reductions in the technology or supply chain to match the subsidy cut of 42.4pc over the previous six months.

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Q&A with Renewable Energy Association

QNo dedicated biomass CHP was awarded a CFD in the first round, so how can CFDs work for biomass CHP? And how can the government improve the scheme to encourage biomass CHPs?

“There are a set of conditions but essentially it comes down to how Decc treats projects that lose their heat loads — at present such companies would

lose CFD support and that becomes impossible to finance against. An approach that focussed on due diligence of a project’s heat load and viability before a scheme was awarded support could address this by focussing accreditation up-front, rather than on a regular basis, while still ensuring bogus schemes are rejected.

QREA has before called for more frequent CFD allocation rounds. What do you see as the ideal in terms of number or frequency?

“We absolutely require more frequent rounds. One year is a long time to wait if a business is unsuccessful in the last round, and this is particularly the

case with small and mediumsized enterprises (SMEs). We believe they should be on a quarterly basis, or at least six monthly, to reduce uncertainty for developers.

QUtilities have already expressed concerns over the “2027 cliff edge” for industrial biomass in the UK when the CFD subsidies expire. How can the biomass industry in the UK be ensured longevity after 2027?

“Clearly the government see biomass electricity as a transition technology and until this changes policy will remain as it is. The 2027 electricity cut-off date

should not affect heat only schemes of course, and we hope this sector can continue to grow steadily. For electricity, the capacity market is a mechanism which may be looked at again by developers, as there is nothing to stop a new biomass scheme which is not receiving renewables support from applying for the capacity market. The last auction clearing price was seen as too low by the industry, but this may change if costs come down and the clearing price increases.

In general, the characteristics of biomass power remain attractive for many reasons, due to providing such reliable, stable low-carbon energy, and this will not change and the REA will continue to make the case for biomass energy in all its forms to the new government.

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QWhat role does REA see biomass playing in helping the UK reach its 2020 climate change targets?

“Biomass has proven to be very successful in delivering low-cost renewable energy. In the non-domestic RHI, biomass has so far delivered 92pc of the heat

generated under the scheme. According to European biomass association [Aebiom] and Eurostat figures, 89.9pc of renewable heat in the EU comes from biomass, and it would be surprising if the UK differed much on this front. Biomass is also an important contributor to electricity targets and we believe it should be given an increased role. The stable, predictable power biomass provides is of huge benefit to the grid and it should therefore be incentivised appropriately.

QWhat is the REA’s main focus in regards to biomass and where can the greatest growth be possible for biomass in the UK?

“We will continue to champion the on-going success of biomass in the RHI mechanism, and argue for greater support for biomass electricity. With the right

regulatory framework and policy certainty, we will continue to see growth in the biomass markets in the UK, and biomass has a huge potential for heating up schools, hospitals and hotels.

26

Q&A with Renewable Energy Association

Q

Qwith Dong Energy

Q&AArgus reporter Rachael Levinson interviewedDanish company Dong Energy’s vice-presidentfor thermal power Peter Thomsen

What is needed to help increase liquidity in the biomass market?

“Two things need to happen. The industry needs to see a broad adaptation to common sustainability criteria and with the Sustainable Biomass Partnership

(SBP) we think that we are on the right track, but it could happen faster. We need common EU sustainability and greenhouse gas (GHG) accounting criteria that can substitute the national criteria. As long as there are different regulatory requirements it will limit liquidity. We also need to see more standardisation. Up until now, there has been a good balance between supply and demand, but the market may not be as bullish as previously. Dong Energy is currently considering renewing the effort to standardise — commoditise — this market at several levels such as a standard master agreement, quality specifications, harmonisation of lab analyses. Ultimately, the effort to commoditise wood pellets will increase the biomass market’s visibility and attractiveness to new players, with the added benefit of potentially increasing its lobbying power.

Should more governments implement subsidy support schemes for biomass to support the market?

“Yes, too many regulatory regimes avoid biomass despite the obvious advantages in mixing biomass

power with intermittent renewable technologies in order to get at a stable low-carbon electricity mix. No other technology addresses the energy and climate trilemma as well as biomass. Biomass delivers serious CO2 reductions at a low cost and while keeping security of supply. Nothing compares to that. However, the industry needs to become much better in telling this strong story. The regulators and politicians are simply ignorant of the benefits of biomass.

27

QQQ

QDo you view SBP as an important step for the market to prove sustainability and help increase liquidity? And when will it be fully adopted by the market, with all major producers and buyers using it?

“It is essential to have common ground. I hope 2016 will be the turning point — we already have the first suppliers on board — and once they see it actually reduces

their efforts to have one system I am confident everybody will follow suit. To be frank, SBP is for the good of the entire industry. If we cannot present a credible sustainable story the entire industry will be at risk.

Has the strong dollar against the euro this year influenced where you have sourced and plan to source your wood pellets from?

“Yes, we have for the moment scaled back plans in the US as a result of the dollar strength.

Do you foresee Russia becoming a more prominent exporter of wood pellets? If not, what are the main barriers?

“Not really. It will grow but not play a major role. I believe that we can get comfortable with the sustainability of Russian wood pellets through

comprehensive third-party certification. But doing business in Russia presents a serious business risks. The endemic problems with corruption, lack of legal protection and unpredictable political decisions mean that it will not be a major sourcing area for a good time to come.

Have you made final decisions on the conversion of Asnaes and Esbjerg to burn wood chips and do you have timelines for conversions?

“We believe it will take place in the 2016-18 timeframe, but nothing is decided yet. While the fossil fuel-to-biomass conversions share many similarities, we develop

bespoke technical solutions for each plant to achieve the optimal green business case. Our conversions of Studstrup unit 3, Skaerbaek unit 3 and Avedore unit 1 are fortunately on schedule, on time and on budget. And we are doing that with a very strong safety record.

28

Q&A with Dong Energy

QQQQAre you looking at other power plants to convert to burn

biomass?

“We are exploring where it could make sense to apply the experience we have from making conversions in Denmark, but we do not have any active projects.

What affects your decision to convert a power plant to wood chips over wood pellets or vice versa?

“There are many factors but the two most important ones are power-to-heat ratio and the type of boiler you are trying to convert. Deciding on chips or pellets comes

down to what gives the most robust business case.

We have seen UK power plant Drax move towards vertical integration with the start-up of its wood pellet production plants. Would Dong ever consider going upstream and purchasing a wood pellet production plant?

“I will never say never, but we have no current plans and in my mind we are better off sticking to what we know best, which is producing power and heat based on

sustainable biomass.

We have seen the UK scaling back subsidy support for biomass over the past year. Do you find this a worrying trend in the industry?

“Yes, regulatory certainty is important and the current void on the contract for difference (CFD) regime is unhealthy. The EU is not helping with the lengthy

process on state aid clearance. Denmark has had [more consistent] policies on renewables, but the legislation has taken too long a time to implement. A decision on the current regime was reached in March 2012 but took close to two years to implement.


29

Q

QQDo you think that there is strong potential for the US

to become a co-firing market under President Barack Obama’s clean power plan?

“To be honest it is hard for someone not intimately familiar with the US energy market to have an intelligent opinion on this question. The role of

the states versus the federal government is not clear for outsiders. I am not familiar with any concrete plans, but co-firing is an obvious way of short-term reduction in CO2 emissions, but in the longer term conversions are needed to deliver the climate benefits we need.

What is your overall outlook for the wood pellet market up until 2020?

“I would like to see increased standardisation on trade terms, sustainability and quality. Perhaps we will see a simultaneous development of niche

markets in black pellets and low-quality pellets. And there will be an increased convergence between the industrial market and residential market — it is to the benefit of both markets that pellets can be traded across. The upcoming focus of the effort to commoditise the wood pellet market should emphasise our continued commitment to SBP, develop a more effective standard master agreement, review and harmonise the standard quality specifications, organise a laboratory ring test and promote spot trade.

What is your overall outlook for the wood chip market up until 2020?

“We will see a large increase in demand for wood chips in the coming years, but the market will probably continue to be smaller than wood pellets as the

handling and transport make it a local and regional fuel.

30

Q&A with Dong Energy

Q

Qwith Graanul Invest

Q&AArgus interviewed Estonian wood pelletproducer Graanul Invest chief executive Raul Kirjanen

What is the best way to increase market liquidity?

“Of course we need more customers in the market in order to increase liquidity and I think that is coming. Hopefully the projects in the UK will get EU state aid approval

quickly, the Netherlands has some interesting developments, Belgium has some movement, quite a lot is going on in Denmark and Finland, and so on. I think we will see more industrial applications for steam and heat production based on wood pellets in the coming years.

The biggest problem I think is that the industry in general has taken a defensive position towards its role. We are arguing that biomass is not bad, instead of arguing that biomass is the perfect solution for moving from a coal and natural gas-based energy mix to green energy. Many other fields of renewable energy have done a much better job, such as wind and solar. In the end every grid needs reliable and guaranteed power output and Europe is full of coal-fired power plants that have all the infrastructure but because of high emissions cannot operate any more. Converting those plants to burn wood pellets is a cheap and reasonable solution.

Has the continued strength of the dollar helped Baltic producers?

“Of course today we are supported by the exchange rate but at the end of the day wood fibre is also an international commodity and currency exchange rate changes

will have an impact on pricing, meaning fibre in the US will get cheaper in US dollars and our raw material more expensive in euros.

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Q

QDoes Graanul have an interest in expanding sales in the European home heating markets?

“We are active in quite a few countries — Denmark, Sweden, Italy, France, Belgium, the Netherlands, the UK, Germany — so it is a known marketplace to us. I think

that the last few winters and changes in the currency exchange rates have made the residential pellet market more volatile. In the summer, nobody wants to buy pellets to stock anymore and that means that when the demand season starts we will see supply constraints, logistical constraints and in the end huge price fluctuations. We may even have a shortage of supply if the winter is cold enough. That is the worst-case scenario, when a homeowner with a stove cannot heat his house because there are no pellets available or because pellets are too expensive. I am not very certain that in the current environment of cheap energy sources — electricity, gas , oil — and new technologies developing fast, we will see huge growth of the residential market in the next few years. If there is growth it is likely to come from commercial heat solutions, industrial heat and steam solutions and central heating networks.

Do you foresee any opportunities for exports to Asia-Pacific?

“Asia-Pacific markets are interesting and will potentially be big in the future, but as long as the quality parameters are not really fixed and the co-firing rate is below

5pc, I think our pellets are too good for Asia-Pacific. And they are too expensive to ship from the Baltics. A more realistic scenario is that Canadian west coast pellets will increasingly move to Asia-Pacific and those volumes will need to be replaced in the European market with pellets from other sources, including the Baltics.

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Q&A with Graanul Invest

QWe have seen some vertical integration with Drax and RWE building pellet plants in the US. Do you foresee expansion of that kind for producers — producers entering the power generation market?

“Graanul Invest has four combined heat and power (CHP) plants in operation and is currently building two more. They form part of our pellet production process, but

one of the main aims in developing them was to understand the tricks of power generation. Unfortunately there are not that many pellet producers in the market that financially can go into power generation, but I am sure that as time goes by we will hear more and more of such developments.

QAre there concerns among Baltic producers that new sustainability criteria, such as Sustainable Biomass Partnership (SBP) and Dutch requirements, are difficult to attain?

“In general Baltic forestry is very sustainable and because of the wood fibre that we use, there is no problem in meeting sustainability standards. The problem is

that in heavily forested countries, such as the Baltics, forestry is a way of life — socially, culturally and economically — and so forest usage is tightly regulated by national laws. So the level of third-party certification is not high, because it is not relevant. I do not share the view that we need to create a certification industry, especially within the EU. The EU common market should have legislative rules in place, looked after by national authorities, not third-party consultants. SBP is a good example of that. I think the programme has been made without actually taking into consideration what sustainability is and instead trying to make a checklist. If the system is created such that we cannot use legal sawmill residues in the EU, but instead have to use round wood for the purposes of making pellets, then this is not a very wise solution in my opinion. Nevertheless, I hope that SBP will evolve and understand that for the biomass-to-energy industry it is important to be actually sustainable rather than creating the facade that everything has been checked and so is deemed sustainable. As our customers want SBP we will try to achieve it, we will see whether we are successful or not. But eventually there will have to be co-operation between SBP and producers if SBP wants to be the certification scheme accepted by both public opinion as well as industry.

33


Q

Q

QFollowing the recent acquisition of Latgran, do you have further plans for expansion and acquisitions? Do you think that we will see more supply-side consolidation in the biomass market?

“Graanul has quite an aggressive programme to develop new plants, but of course if an interesting acquisition opportunity appeared we would always have a good

look. I think as pellet customers get bigger they need better security of supply, more flexibility and long-term price certainty. You need to be of a certain size to fulfil those needs so consolidation will continue. The problem as I see it is that the pellet production business is not very healthy at the moment, and that poses financing issues for such consolidations.

We are focusing on vertical integration and are going into forestry — both by creating more forest management capacity and also buying forestland to create long-term pricing stability for our pellets.

On the supply side, do you think that we will see Russia becoming a more prominent export source?

“Russia has a lot of wood but it is completely unpredictable. We have seen trade barriers set up with just one week’s notice by the Russian government. With that

environment it is impossible to create long-term sustainable business with reasonable delivery security. SBP considers Russian wood to be one of the most sustainable in the world. I have been there a couple of times and I see it somewhat differently. I think if Russian volumes grow, we might start to hear of more issues with those volumes.

So the key to development there lies somewhere in a drawer in the Kremlin, and today depends on the actual willingness of customers to gamble on the Russian market.

What is your overall outlook for the wood pellet market up until 2020?

“I hope that European governments that are well behind their EU 2020 targets will see that converting existing coal-fired plants is a reasonable and long-term

solution to generating reliable renewable energy. The 2020 deadline is very close and I think anything that is planned for 2018 we would already know about, so the time is short to make decisions if governments want to be ready by 2020. I expect growth in all sectors, but which will grow the fastest is in the hands of politicians. I hope that governments will also recognise the huge potential and benefits of industrial heat and steam — the high efficiency of those installations, the local jobs they will support and the speed at which they can be developed.

34

Q&A with Graanul Invest

QHow can the biomass industry counter claims of unsustainability, and counteract negative press articles?

“The question is what should we do better in order to show the world the great achievements we have made in this sector? We can let wood rot in the forest

or we can use that captured CO2 to generate energy, plant new trees that can recapture it for another cycle and so on. Forestry and the wood industry are healthy if they have a market for all the products and waste. Low-quality wood basically has one market only — energy. And forestry is one of the main incomes in a lot of rural areas so if we restrict forestry we destroy the economic and social balance of entire rural communities. I believe that without the pellet industry, the Baltics’ forestry and woodworking industries would be in great peril as there are no other markets for waste products. We are sustainable not only in the sense of how trees grow, but also locally, socially and economically. In the future energy mix we need all sorts of renewable power generation, but biomass must have a substantial role in this


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with Pinnacle Renewable Energy

Q&AArgus interviewed Canada’s largest woodpellet producer Pinnacle Renewable Energy seniorvice-president Vaughan Bassett

QQ

What has been the biggest advantage for Canadian producers in the past year? Has the strong US dollar helped support your export sales?

“Where we are contracted in US dollars, the exchange rate has undoubtedly helped. Expectations of the Canadian dollar are for more of the same in the years

ahead, so this will be good for us. But a significant advantage for Canadian producers continues to be our powerful sustainability credentials, given that we use mostly residuals from mainly certified and Crown protected forests.

We have seen some pellet producers show an interest in purchasing power plants — most recently with German Pellets’ agreement to buy Eon’s Langerlo plant. Would this ever be something Pinnacle would consider?

“Never say never, but if our owners invested in any downstream assets it would be for all the right economic reasons. That said, the pellet industry would probably

prefer to stick to what it knows best and that is growing out the pellet supply chain. But it will be interesting to see what becomes of Langerlo and how this move potentially changes the market dynamics.

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QIs the Japanese market more attractive than the South Korean market at present because prices have dropped so low in South Korea?

“They are two completely different markets. South Korea is a spot market, for those suppliers that have no long-term commitments or which are unable to have long-

term commitments. A lot of sellers are floating around the market, offering prices that do not make an awful lot of sense. But spot offers do not really have a place in Japan. That is not the way the Japanese projects intend to buy their fuel, because most of them are running dedicated biomass plants that cannot risk any supply interruptions. So, it depends on what you want out of life. If you want to supply the spot market, you would be magnetically drawn to South Korea. But if you wanted to be a long term, low-risk supplier you would tend to go with Japan.

QWhat is your outlook for the wood pellet market in 2025? Do you think Pinnacle could be selling into a new US wood pellet co-firing market by then? Do you think you will have a greater focus on the residential/premium market then?

“My view is that by 2025, China will have come into the picture as a significant consumer of wood pellets. So it will be an interesting time for everyone. South

Korean generators are likely to be in competition with China for nearby produced southeast Asian wood pellets. South Korean independent power producers will have partly contracted their fuel by then but might still be short on their uncontracted quantity. Japanese projects that have contracted with reputable fuel suppliers will be virtually unaffected.

US and European wood pellet buyers, all things being equal, would probably compete quite strongly for North American supply. But I sense that the Europeans are already thinking about this issue and are trying to position themselves with even longer-term offtake agreements. This could work to shut out some American buyer competition, but the weakness in the execution is that European governments are being increasingly coy about future subsidy programmes. So in the end, it might be this very reluctance by European governments to enable their utilities to contract fuel longer term that inadvertently makes the American biomass buyer a more attractive prospect for North American biomass.

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Q

Q

QAre you concerned that new sustainability criteria, such as the Sustainable Biomass Partnership (SBP) and Dutch requirements, are difficult to attain? Will Pinnacle obtain SBP certification?

“We welcome sustainability as a principle and the achievement of certain standards as a licence to operate. We are not concerned that sustainability

standards are being carefully considered and rigorously tested and at Pinnacle we have even agreed to guinea pig some elements of the SBP. We plan to be SBP certified by the end of this year.

Many market participants are frustrated with the UK scaling back subsidy support for biomass. Do you think that there needs to be more promotion of biomass as a technology by the industry — or something else to get more governmental support?

“I think the flaw in the logic here is that biomass has not been accorded the correct status, which is that it is a dispatchable energy, that is produced

on demand. And you can say what you like about sunlight and wind, but they are not dispatchable. So the real question to me is — do the right policy makers know what the right answers are in terms of energising Europe into the future, and have they figured that all out? When that question has been answered, the subsidies will start to fall into the right technology buckets.

Do you see potential for the residential market in Canada and the US to grow in size?

“Yes, it is happening all the time. The Hearth, Patio and Barbeque Products Association just published some encouraging statistics showing that 2014

sales of wood pellet appliances grew by 22pc in the US and by 79pc in Canada, for example. Gas remains inexpensive in North America, but it does not cover the entire country.

38

Q&A with Pinnacle Renewable Energy

QQ

QWould you want to sell more in the future to the residential market in Canada and the US?

“Yes, we certainly want to increase our share of the domestic residential market — especially since you do not have to ship it 16,000km. It is a relatively small market

in Canada — but it is a large and growing market in the US. Not only that, it is focused in certain key areas. In an area the size of Germany, Italy, and France, you probably have most of the wood pellets consumed in the US.

The Canadians are more in a position where they can think seriously about how to provide heat and power to some of the more remote parts of Canada. It would not be economical to build a gas-fired power plant to service a small community for example. But that small community will still have to have a school, a clinic and other infrastructure that needs heating, so wood pellets have been seen as a preferred fuel for those situations.

What does the biomass market need to increase liquidity?

“The wood pellet supply chain has developed on the back of long-term offtake agreements. In the future, it seems likely that this supply chain will require a

lot more investment if it is to grow to fit the demand curve that we anticipate. So as a wood pellet supplier, we would prefer that this investment is backed by long-term offtake agreements, not by a growing spot market. On the other hand, we completely understand the need for improved cargo tradeability between participants. But in the hierarchy of these two needs, I would rate tradeability second to growing out the supply chain.

We hear some producers in British Columbia have faced difficulties in obtaining raw wood material from sawmills. Is that a challenge faced by Pinnacle?

“It is not a challenge we face at Pinnacle, mainly because we have aligned ourselves with the best and biggest sawmills in the province. We turn their waste

into a viable and important revenue stream for them and in return, this protects our raw material supplies. Since sawmills are not allowed to burn their waste any longer, it is critical that these residuals do not choke their system. Pinnacle’s seven production sites across British Columbia are ideally placed to satisfy that requirement.

39


Q

with Wood Pellet Services

Q&A

What figure would you attach to Iberian wood pellet production capacity — both industrial and residential — and how do you expect that to shift in the coming years?

“The installed capacity is over 2mn t/yr, but actual production capacity is about 1.4mn t/yr, although in my opinion that may decrease. Portuguese producers

will have wood supply problems, so production could decrease. In the long run 1mn t/yr is a solid number to consider from Iberia, with maybe 40-50pc of that capacity dedicated to residential pellets. But the Portuguese market is absolutely maxed out — we are already seeing examples of this with Portuguese producers such as Portucel/Enerpar and Enerpellets expanding into the southeast US. I think a lot of plants in Portugal could close.

Argus interviewed Wood Pellet Services’ founder and director,Tiago Andrade, about the state of the Iberian market, new opportunities, challenges for producers and the outlook for the biomass market

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QGoing forward, which countries will Portuguese producers be targeting for residential pellet output?

“Portugal’s natural market is ARA and the UK for industrial output. As for residential, Belgium, France and Germany are the main export markets. We are

seeing an increase in volumes going to Germany as they sell their white pellets to Italy and Scandinavia. In Germany and Austria they are burning Portuguese and US pellets that are EN plus certified, but they are darker and command ‘less value’ in the market. This is the trend I have noticed in the last 12-18 months, but this year the market is so slow that it is difficult to see any trend at all — the trend is that there is no trend. Spain is also a natural market because of the ability to transport pellets inland by truck. Consumption is growing in Spain, but the country itself has limited domestic production.

Italy looks like a natural market for Portuguese output, but it is not. The freight cost from Portugal is around €25/t on a coaster, which is as high as the freight from the US or Canada. As for Canadian pellets, they have one big advantage in that they are white in colour. In Italy there was a huge mistake made by some distributors that put in people’s minds that white pellets are the ‘good ones’ and other pellets are ‘bad’. In actual fact one could say it is the opposite. Pine pellets with darker colour offer higher energy content, typically less fines owing to high content of lignin and they burn better. But as a result of that marketing decision, there is now a price differential of as high as €15-20/t between the two pellet types. Consequently, Portuguese producers have to sell cheaper and have higher costs to get product to Italy. Therefore we cannot compete with Canadian pellets and the static Canadian dollar has added pressure to the situation.

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QIs there one way to increase market liquidity? Could governments implement new subsidy support schemes for biomass to increase this? Does the market need more participants?

“Subsidy policy cripples the sector. It puts a stamp that you are not competitive without the subsidy and that takes a lot of equity investors out — they hate

to be subsidy driven and dependent on policy. It has slowed down our sector, but unfortunately, to some extent, we need them. But again, if some of the maths done for subsidies included the grid, they would not necessarily need to be there. When you compare the existing price for nuclear, offshore and onshore wind, and solar,- no-one thinks about the grid. If you deduct the cost of the grid on subsidy, not to mention the environmental costs and stress of new power lines in countries with high density of population, the numbers on biomass are not so bad. Apart from coal, you will not find another base-load energy source for power in Europe without having to deal with Russian gas. Mathematically biomass is a very good source of energy. It is more than a transition to something else, which is how it is branded in some countries. In Denmark, it is not subsidy dependent. It is all about a decarbonised economy. If you go by the penalty system, it makes far more sense. We need to activate the dead CO2 market, and if that happens it is a better way to build the sector or industry. The UK is a good example of what happens with changes to subsidies. New projects in the UK have suffered at the hands of the European banks, which say ‘well, maybe the UK will change again’. Now the Netherlands is saying ‘yes to pellets’ again, but will they say yes again after eight years? It is difficult to know.

42

Q&A with Wood Pellet Services

QMarket participants have questioned the fact that people have not consolidated already in Portugal to compete with growth in the US and the Baltic states. Do you think we will see further consolidation?

“With one of the largest pellet producers in Iberia, we have designed a strategy for the next five years to become one of three leading companies in the sector.

My role is to help consolidate the Iberian market by buying out other plants — the ones with chances of succeeding. If consolidation works, we can start reforestation and looking at other energy crops within Portugal, as well as where to expand internationally, with North America being the natural place to be. I think it will always be difficult to compete with the US on price. What the Portuguese can offer is a lower carbon footprint, flexibility with the coasters and a seamless switch between residential and industrial production. That switch is easy to do in a 60,000-100,000 t/yr plant, but in a 500,000 t/yr plant it is more difficult. You will experience issues with export terminals as you cannot mix industrial and residential pellets. In that sense, Portugal can dedicate smaller plants coupled with sawmills to serve only residential markets and the larger 100,000-120,000 t/yr plants to supply industrial consumers. It makes more sense than continuously switching in the same plant, as it is difficult to guarantee quality on what is a homogenous product. Even if the exchange rate stays as it is, the problem is that every year the electricity price increases and wood costs go up by 2, 3, 4pc, sometimes 7pc. In the case of electricity this happens in Portugal and Spain. After wood, electricity is the second biggest cost. It makes life very difficult for Portuguese producers. At the moment we have help because of the exchange rate, but in a few years we will be non-competitive again. The main advantage that Portugal can offer is that some utilities want coasters, smaller vessels, and we can offer that flexibility.

QDo you apply this same thinking to the Spanish market, which has had instability with subsidy support?

“That was one of the biggest mistakes that any government could have made, because it set back the mind of any investor by 20 years. All renewable

players suffered because of that decision. But again, if there is a penalty system it is a completely different story. Spain will never be a big market for base-load energy on biomass. It will always be more on the residential market, which is growing quite a lot.

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QPortuguese producers’ industrial spot prices are linked to what they achieve under long-term pricing, but residential prices are subject to more fluctuation. Do you think we will see more spot liquidity in the fob Portuguese market as more producers look to residential markets? And if so, will there be a convergence in pricing?

“I think we will see a convergence — but a lot of that volume will stay inland, so it is difficult to understand the pricing. I do know some of the inland prices and

they are very high, because bagged truck deliveries are not comparable with a vessel price. But I do think the vessel price of residential pellets will move closer to industrial values. While the industrial market has steady price growth, which is €3/t, or 2pc, or whatever is laid out in the contract, residential prices fluctuate. If you look at historical prices, it used to be a €20/t difference — it is now an €8/t difference, and that could fall to €5/t in a few years. So I do not know if we will see Portuguese or Spanish producers doing vessels of residential pellets, I think they will do more and more inland or container door-to-door deliveries. If you are in the UK and want 10 containers a month – they will take it straight to your door because importers may not want to deal with ports, bagging lines, fines problems and sieving – so the door-to-door trend will continue. We are doing quite a lot of that from Portugal to Italy already, and logistically it is the best way to get to the north of Italy. In the south, it is much harder — the container lines are terrible. But when compared with US or Canadian vessels, if you take out 5-8pc of fines that you typically get on pellets for the residential market and if you deduct the money you have to spend on storage, stevedoring, sieving, bagging, this begins to make the Portuguese option look more competitive. Prices on residential vessels will equalise with the industrial price in the short term. But in a year when demand for residential pellets is high, the price will spike and everybody will want to sell residential and make money. But on a 10-year view, a pellet plant cannot base its business on selling residential at high prices in bulk. A producer needs an existing market, such as the stability of industrial offtake, or it will be difficult to compete.

QAre you concerned about the Italian VAT increase at all?

“Not at all. Trade being an intra-community EU transaction, you are exempt from VAT. Of course in the end buyers will suffer because of it, and the distributors

as well the consumers should react, but most have already converted their boilers. A few may switch back to heating oil, which is now at historic lows, but that will rise up again. People like pellets, they are clean and for some users waving the green flag is important — those people will not back-track. But as producers, the VAT does not mean anything on transactions with distributors. This VAT increase is again a great example of how much and how easily politicians can cripple a sector.

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Q

QWhat is your outlook for 2015-16, particularly with a lot of new capacity coming on line?

“Next year is looking to be a difficult year. My biggest concern for the next 7-10 years is actually next year. From 2017 onwards, I am not so worried. There are

enough projects coming on line on the end-user side to balance the new capacity. I think also that some of the production projects will be delayed. To get the commissioning ramp up is tough and I believe they will have issues and push back more towards 2017. At the end of 2016 there is new Dong capacity, which can absorb some of the anticipated higher output. On another note, I believe the Netherlands may pick up earlier than expected for co-firing. And of course, we all need a good year on residential in 2016. If we have another bad season in 2015-16, we will have huge storage issues and producers without sufficient finances will be in great trouble. One or two companies are starting to do inventory financing and that is interesting, but of course they only do it with the solid players, not with the small and medium-sized producers that only produce 50,000 t/yr.

Do you think a unified sustainably criteria such as SBP will be a boost for liquidity?

“It helps to make pellets more and more of a commodity, as it was with the implementation of a standard contract. But it is too one-sided, as it is made by

the utilities with little collaboration from the producer’s end. Things only work if everybody embraces them. It can be the standard, but if everybody is doing their own particular contracts then it does not work. I do not see anything wrong on the draft version I have, but I am afraid that in the Netherlands they may have been a little bit too demanding. I have heard from some of the utilities on that and they are worried. They are starting to feel that all European producers will find it hard to comply with what the Dutch want and that does not make sense because they need the coasters there. If people will not embrace it, then it will not be a success. Only if people take it as the standard, will it help.

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Biomass leaders’ predictions for the industry Q&A with Wood Pellet Services

QWhat new markets could open to producers going forward?

“South Korea is going to boom to 5mn-6mn t/yr. It is likely to plateau at 6mn t/yr from nearly 2mn t/yr at present. And Japan has to happen, no-one knows

when but it has to happen. But the hidden champion is certainly Germany. I know some utilities are starting to look at the possibility that the authorities will raise the MW size of production of energy that is now authorised for subsidies. No-one is thinking of creating a Drax, but if they raise that level to 100-200MW, you see that Germany could easily become a huge market in the next decade. It does not attract a lot of attention, and people often group Germany with Austria on the residential side — but the options there are huge for industrial pellets. They are shutting down nuclear, no-one wants to go back to coal — so what are the options for base-load energy? Also here in the UK, why do we not use the existing grid? To make new grids is extremely difficult with high population density. I do not understand why some of the conversions in the UK did not happen. Even on a co-fired basis it would make sense as it is quick to implement. Germany is going to make the better case for this than the UK — it will be smarter and it is certainly looking at that as we speak. Even in Europe, in the Spanish islands and in the Portuguese archipelagos, hotel chains everywhere are aware of this option for power and some of the local legislative providers are also looking at that. They depend on tourism, they need to be sustainable, they need to get all these green flags up, and it is not just with solar panels. So even on European islands it will be an increasing trend and of course we are trying to get involved with that along the entire value chain. Islands are where wood pellets make more sense for energy without subsidies, on a pure competition basis. They can always beat gas or oil or coal, even with oil prices as low as they are now.

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argusmedia.com Biomass leaders’ predictions for the industry · Johan Mertens (GDF Suez), Arnold Dale (Ekman and Co.) and Brodie Govan (PVM). Argus Media is a leading provider of